The Reality of Capitalism: What it Was to What it Should Be

As it is with democracy, capitalism is not really capitalism—unless it is capitalism for all.

Reality is the imagery of an accepted belief at a point in time that is based on the experience and knowledge available. But unlike truth, it is subject to change. Constant change. Reality is not rigid; it evolves with knowledge, perspective and experience. Institutions and beliefs firmly tethered to the realities of the past become an anachronism in the world of new realities that ultimately destroys their very purpose and existence.

The history of the world (and our country) is a kaleidoscope of changing realities; ideas, institutions and practices that adapt to new realities survive, while those that don’t fade into extinction. There was a time when “reality” declared the sun and all planets revolved around the earth; and a time when the earth was flat.

The greatest threat to the discovery and understanding of new realities is an uncompromising, inelastic, clutching hold to existing realities.

Democracy through the Ages

The concept of democracy is a good example of how realities change, and unless these new realities are recognized and adapted, the intended base principle itself will fail. If America had clung to the version of democracy extant at the time of the Revolution, it is doubtful that our form of government would have even survived. When the U.S. Constitution was adopted, democracy was defined as the right of free, white, propertied males – to the exclusion of all others – to participate in the determination of their government. How would you feel about living under that reality today? (Tea Party members need not answer!)

Fortunately, our system of government survived and slowly matured because America recognized the changing realities of democracy and adopted a philosophy best described by Supreme Court Justice Steven Breyer when he wrote in an opinion that, “It was about the nature of democracy that it must work for all Americans or it will not work at all.” (“The Oath” by Jeffrey Toobin, Doubleday)

What happens when Governments Fail to Change

The last century was witness to the Soviet Union and China emerging as the preeminent countries to adopt the philosophies of Communism as the basis for society and government. Today, after barely 70 years of existence, the Soviet Union has collapsed; while, in contrast, China is seen (and feared) as approaching the brink of geopolitical and economic domination. What is it that explains the contrasting results for these two Communist nations?

The answer is simple: The leaders of the Soviet Union stubbornly and tenaciously clung to the realities of Communism that existed during the days of Lenin and the Russian Revolution – total government ownership and control over individual and economic actions – while the Chinese leaders adapted to changing realities – especially in economic matters. China still considers its system to be “Communist” and tightly controls individual freedom, but its economic system has become – in many ways – more capitalistic than that of America. As repressive as it is, the Chinese government has survived (so far) because it has been willing to recognize and react to new economic realities.

And speaking of American capitalism: It has served America well (and America has served capitalists well), creating the most prosperous nation in the history of the world, but as with any other social or economic system, unless those who seek the preservation of capitalism are willing to recognize and adapt to new realities, it too will fail.

Old Realities are on Their Way Out

The initial realities of capitalism in America were based on the individual freedoms of risk, effort and reward. The protagonists of capitalism in America cited the egalitarian theory that anyone and everyone enjoyed the same economic freedom to become a capitalist and benefit from capitalism. But much like the early realities of democracy, the freedom of capitalism was limited. Spawned by a brand of capitalism reserved for the likes of the Vanderbilts, Rockefellers, Carnegies and J.P. Morgans, most Americans lacked the opportunity, education, experience and capital necessary to be true capitalists in the system.

As a result, most of those who participated in the early capitalist system did so as surfs of the system; they were captives, not capitalists. This system created a pyramid of power, control, opportunity and reward that flowed to and from the top. Any benefit for those below “trickled down.” Those who toiled in this capitalist system were entitled only to a daily wage paid for the tasks they performed. They had no rights to the rewards of capitalism, although they always shared the risks from a failed venture.

This is not to suggest that the system was evil or inequitable; it was consistent with the realities of the time. In reality, very few possessed the education, experience or access to capital that would allow them to flourish as capitalists. The truth is that the country and most people benefited from the actions of a few entrepreneurs who controlled capital and were willing to risk it in exchange for the opportunity of potential reward. This reality made it acceptable and appropriate for the capitalist system to be structured in a top-down fashion, because those at the top were providing the needed capital and taking most of the risk.

But the realities of capitalism have changed and unless there is a constructive response to the new truths of capitalism it will degrade into a plutocratic system – where fewer and fewer have more and more – that will ultimately destroy not only capitalism, but the very basis of our freedom and democracy.

The good news is that the response can be simple and effective; the bad news is that those with the power to respond to the new realities of capitalism – like the leaders of the Soviet Union – see no reason to do so. The needed changes don’t weaken or destroy capitalism – they strengthen and preserve it. There is a parallel with democracy here: If democracy works best when all are allowed to participate, so too will capitalism if all are allowed to participate.

The New Economic Reality

The new realities of capitalism call for two new understandings.

First, we need a new definition of “capital.”

Second, we need to adopt a “bottom-up” rather than “top-down” philosophy of opportunity and reward.

At the dawn of the 20th century, cash was king of capital. Huge amounts of capital were required to build the infrastructure of our economic system, which was mainly based on manufacturing. The economy of today and tomorrow still demands investment, but what it really needs is a new type of capital to fund its success.

This new type of capital is controlled by and can only be provided by the well-educated, thinking and creative employees of today. And they don’t work for a business; they are the business.

But in the same way that the Rockefellers of yesterday were not willing to risk their capital without the promise of potential reward, the employees of today will not risk their capital – their education, creative brilliance and hard work – unless they have the promise of potential reward. And not that old, trickle-down variety.

The new reality of capitalism can simply be defined: Those who have the ability to add value to an organization will do so, if they are allowed to share in the rewards of the value they create. In essence, because of the new type of capital contributed by employees of today, they should be recognized as a new type of “shareholder,” imbued with the right to share in the value their “capital” creates.

That’s the new currency of business success, and it’s alive and well at a number of entrepreneurial companies I’ve written about in the past: FedEx, Cisco, Google, Apple, Southwest Airlines and others. Companies like these put the employee in parallel with other investors, since that’s where they belong. And if these changes like these are adopted nationwide, capitalism will not only survive in the U.S. – it will be strengthened.

And the Moral of the Story …

Reality is the state of things as they exist at a point in time, but just as times change, so do realities. It is important to understand and respect the realities of the time, but not to the point that one is blinded to the emergence of new realities. History has shown that the realities of tomorrow will be different than the realities of today. Failure to recognize and adapt to new realities assures only one reality – failure.

America responded well to the changed realities of democracy and grew stronger. But the realities of capitalism have changed as well and unless we are prepared to respond and change, the entire system will be at risk.

Implementing the new reality of capitalism calls for recognizing that the future power and success of capitalism emanates not from the top-down, but from the bottom-up. Just as democracy is strengthened when all, rather than just a few, are allowed to participate, so too will capitalism be preserved if all who have the ability to add value are allowed to participate, not as captives, but as capitalists.

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Founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., Bob MacDonald regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better management, smart business leadership, government and politics, and of course, the life insurance industry.

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Bob MacDonald, founder of LifeUSA Insurance and retired CEO of Allianz Life, N.A., regularly blogs with timely, hard-hitting comments on almost every business subject from entrepreneurism to better
management, smart business leadership, government and politics, and of course, the life insurance industry.